What is elite service worth?
An expert on profitability offers smart advice on pricing.
Dear FSB: I own one of the largest electrical companies in the state. Our uniformed workers respond to customers' homes within one hour of each call, with guaranteed service 24 hours a day. As a result our overhead is about 40% more than our competitors', and our prices are higher. How can we offer top-notch service and still stay profitable? - Bill Augustynski, Owner, August Electric Dudley, Mass. (augustelectric.com)
Dear Bill: "Make sure there's a market for deluxe services in your area," cautions Michael Simonetto, who heads the pricing and profitability practice of Deloitte (deloitte.com) in Atlanta. Simonetto, who spent 15 years in construction before becoming a consultant, urges you to take a closer look at your costs. "A 40% premium is too high and indicates you've got some inefficiencies. Even for premium service, your costs should be at most 25% higher."
To decide what to trim, Simonetto suggests you try to figure out which customers want extra service and what they need. "You're probably assuming that everyone cares about stuff that isn't important to some of them," he says. Keeping your entire staff in uniform is expensive, he notes, and not always worth it. "Someone home alone may be reassured by the uniform, but at a construction site, customers don't care if your people wear tobacco-stained overalls as long as they show up" - and do good work.
Likewise, he says, "it's very costly to offer one-hour service, and it's usually not necessary." Here again, you could segment the market: Have one basic, relatively low fee for routine service calls, plus one surcharge for speedier service and another for late-night calls.
For a clearer picture of what customers want, Simonetto suggests you contact the marketing department at a local college and see if a professor might be interested in assigning students to perform market research that uses a customer questionnaire with an either/or format. This type of study will allow you to ask key questions such as "Would you rather have a uniformed electrician or a lower price?"
Look for revenue boosters that could offset the cost of the extras that you provide, Simonetto adds. Training your repair team to sell annual-service contracts on each call could make these trips far more profitable, he notes.
What strategies do you use to make sure that your product or service is priced appropriately? Are there any surefire signs that a business is charging its customers too much? Share your experiences with our entrepreneurial readers on the Ask FSB online forum.click here.